Hopeful Signs: Manufacturing, Housing Show Gains

By Annys Shin and Dina Elboghdady
Washington Post Staff Writers
Thursday, August 27, 2009

Manufacturing and housing, two sectors that have suffered some of the largest job losses in this recession, showed signs of strengthening in July, the latest indications that the economy is on the mend.

A spike in demand for commercial aircraft and motor vehicles lifted orders for durable goods by their biggest margin in two years, while new-home sales increased for the fourth straight month, the Commerce Department said Wednesday. About 3.5 million jobs have been lost in manufacturing and construction since the recession began in December 2007.

The reports are likely to bolster the view, shared by a growing number of economists, that the recession is winding down or has already ended. Olivier Blanchard, the chief economist of the International Monetary Fund, said in a paper published Tuesday that a global recovery has begun.

"My overall sense is we have hit bottom," said Wells Fargo economist Tim Quinlan.

The reports made little impression on Wall Street. U.S. stocks rose briefly in response to new-home sales, then fell for much of the day before closing slightly up. The blue-chip Dow Jones industrial average gained 4.23 points, or 0.04 percent, to close at 9543.52. The broader Standard & Poor's 500-stock index rose 0.12 points, or 0.01 percent, to 1028.12. And the tech-heavy Nasdaq composite index finished up 0.2 points, or 0.01 percent, at 2024.43.

The manufacturing and housing industries have both benefited from the Federal Reserve's efforts to thaw credit markets, as well as from federal government incentives such as the "Cash for Clunkers" trade-in program, which ended Monday, and the $8,000 first-time-home-buyer tax credit, which is set to expire at the end of November.

The question now is whether both sectors will sustain their gains once the subsidies are gone or future demand has been siphoned off. Analysts said sales of motor vehicles and homes could sink but are unlikely to fall back to record lows.

"The government incentives are providing a little bit of acceleration at the bottom . . . and frankly we need it," Quinlan said. "Does it mean once the incentives are gone we're back in the soup? I don't think so."

Even before Cash for Clunkers began in late July, the U.S. manufacturing sector was showing signs of stabilizing as businesses began to restock. Businesses have had to replenish inventories after slashing them for months to accommodate falling demand. Excluding motor vehicles and other transportation-related goods, orders for durable goods increased 0.8 percent in July, the third straight monthly increase, the Commerce Department data showed.

Orders for non-defense capital goods excluding aircraft, a key barometer of business investment, slipped 0.3 percent in July after rising sharply in June and in May. They remain higher than they were in April, "a signal that capital equipment demand in the U.S. and abroad has turned the corner," Global Insight chief U.S. economist Nigel Gault said in a note to clients.

The rebuilding of inventories could help kick-start a recovery, but the momentum could peter out if consumer spending doesn't pick up. Many analysts expect consumers to remain cautious as a weak labor market and stagnant wages make it difficult to replace wealth lost in the housing and stock markets. Some analysts warn that if a recovery doesn't gain traction by late next year, the nation could slip back into recession.

Housing, another driver of past recoveries, is in the third year of a slump. But there are signs that that sector is bottoming out. Sales of newly built homes jumped 9.6 percent in July, to a seasonally adjusted annual rate of 433,000, the Commerce Department reported separately on Wednesday. It was the highest sales level since September. Sales for June were revised upward.

The report reaffirmed positive trends reflected in other housing-market indicators. On Tuesday, two closely watched indexes found that home prices rose in July from the previous month in most parts of the country. Home sales, construction activity and builder confidence have all edged up in recent months.

Sales of new homes increased in three of four geographic areas, according to Wednesday's Commerce report. The South, which includes the Washington area and is the highest-selling U.S. region, posted a gain of 16.2 percent. Sales fell only in the Midwest, by 7.6 percent.

The boost in buyers, lured in part by low interest rates and the first-time-buyer tax credit, has helped builders whittle down a surplus of homes constructed during the boom, a key step to regaining their footing in the market. They have also drastically scaled back construction, either voluntarily or because their financing was cut off. The number of new homes for sale at the end of July was 271,000, the lowest reading since March 1993.

If sales continue at the same pace, there would be a 7.5-month supply of homes on the market, well below the 12.4-month supply in January and the 8.5-month supply in June, said Michael Larson, a housing analyst with Weiss Research. A six-month supply is generally considered to indicate a balanced market.

But the new homes are competing with a glut of previously owned homes, which make up the lion's share of the housing market. Prices remain much lower than they were in July 2008.

"Buyers are still going to have the upper hand for the next 12 to 18 months," Larson said. "It will take a long time to get supply and demand into equilibrium on both sides of the ledger."

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